Cuts in public sector expenditure will weaken the economy further, and may even put the state back into recession

The Connecticut economy is in trouble. Deep trouble. Federal statistics released in August revealed that
Connecticut went into recession much earlier than previously known and, critically, the contraction was
dramatically worse. And then recovery in both output and jobs has been weak, and now appears to be
weakening relative to the national pattern. Indeed, Connecticut is one of the very few states whose
recovery measured in output (or household income) is still below its peak in 2007.

Job recovery has been equally as anemic, barely recovering a quarter of the jobs lost while the quality of
jobs deteriorates. The unavoidable outcome has been tax revenues falling below projections, driving the
current state budget into a significant deficit and confronting the Governor and Legislature with billion
dollar deficits in each of the next two years’ biennial budgets, to be adopted next Spring. With the state’s
economy still struggling to recover, the cuts in public sector expenditure will weaken the economy further,
and may even put the state back into recession—measured in terms of contracting output for at least two
quarters. The November 2010 Outlook assessed the potential impact of addressing the massive deficit the
state then faced; without offsetting policies and initiatives, the analysis projected that meeting the deficit
only through budget cuts would impact as many as 35,000 additional job losses, making the contraction the
worst since World War II.

This Outlook again looks at the impact that significant cuts in the state budget may inflict on the state’s
economy by modeling $200 million cuts in each year of the biennium. Such cuts would cost more than
5,000 jobs each year; if cuts rose to a billion dollars, the result would be a loss of about 25,000 jobs each
year, eliminating essentially all jobs created since the recovery began. The current forecast anticipates little
capacity of the private sector to offset the impact of public sector contraction. Ironically, Super Storm
Sandy may help improve conditions as the region rebuilds; this Outlook devotes a section below to this
question.

Even as the state cuts its current services budget it still has the capacity to push forward with capital
projects, funded through bonding. This Outlook then evaluates the degree to which public sector
investments of the same scale as the cuts could offset the economic damage the impending reductions will
inflict. While the public sector will lose significant jobs, the private sector would gain significantly, partially
mitigating the overall impact on the state’s economy and potentially hastening its recovery as these
investments both reduce long‐term costs and strengthen Connecticut’s competitive position…